Author: Avery, Michael (Email: 2 Email <?xml version="1.0" encoding="utf-16"?><dictionary /> 0 0 0 oLinkEmail [email protected] [email protected] false mailto:[email protected] true false %>)
People are stealing our money ! According to the2332 World Bank Report: “Curbing Fraud, Corruption and Collusion in the Roads Sector” June 2011. “…roads projects around the globe remain plagued by fraud, corruption and collusion…”
In some countries, contractors are refusing to participate in tenders/bids because of the extent of corruption.
I hope to encourage you to take action to fight Fraud and Corruption (FC).
It is impossible to precisely know the extent of Fraud and Corruption. The reason is simple. If FC are not identified or reported, it will not be known and recorded. However, there are some useful statistics that can help us understand how wide-spread FC are. Consider these facts:
1. According to the Association of Certified Fraud Examiners, in its “2012 Report to the Nations“ “… the typical organization loses 5% of its revenues to fraud each year. Applied to the estimated 2011 Gross World Product, this figure translates to a potential projected global fraud loss of more than $3.5 trillion.”
2. In a 2009 Report, the943 Asian Development Bank reported that up to 15% of a country’s GDP may be lost to corruption.
3. The Office of the Inspector General of the2364 US Department of Transportation reports for FY2011:
a. Convictions = 79
b. Prison sentences = 70 years
c. Fines = US$ 192, 996, 413
4. Government Services Administration of the908 US Government reported that it benefits $17 for each $1 spent in its activities
5. Another measure of the extent of FC is from international reports. Below are headlines from newspapers published in the last few months:
• “Corruption Deters Investment” (Latin America)
• “Power to Stop Irregular Tenders” (Africa)
• “Managers Lost Confidence in CEO” (Caribbean)
• “Premier Calls for End to Corruption” (Asia)
• “Obama sets up Anti-Fraud Board” (USA)
• “Cost of Fraud in Federal Programs Is Estimated at $12 Billion” (USA)
Fraud can occur at any stage of a project, but the amount of “money at risk” to fraud is higher at the early stages of a project life cycle.
I have been fortunate to have lived and worked in 35 countries. Based on my experience, there are four common types of FC on transportation projects.
1. Procurement of Contracts, Services or Materials. The FC that may occur during procurements includes Kickbacks, Bribery, Conflict of Interest and Bid Rigging/Collusion. FC can occur during Procurement because there are large amounts of money involved, the Procurement fraud can be committed with fewer people involved, and there may be no paper trace.
Although there are many types of Procurement Fraud, two common examples are:
• Contractor secretly pays a government official for being awarded the contract
• Contracting or oversight official fails to disclose a conflict of interest which impacts the contract award or contract oversight
2. Time Overcharging. This type of fraud occurs during a contract and may or may not involve contract oversight officials.
Examples of Time Overcharging include:
• Contractor falsely records hours worked and charges the government for those hours
• Contractor fraudulently records employees as having worked, when in fact they did not. These are known as “ghost employees”
• Contractor charges for time worked and is paid. Contractor then puts pressure on its employees to accept a lower salary than was agreed or return a portion of salary paid
3. Materials Overcharging. This fraud occurs during construction projects and may or may not require the knowledge and cooperation of field inspectors. Materials overcharging has a greater impact when there are high cost materials involved such as steel, bridge components or asphalt.
Examples of Materials Overcharging are:
• Contractor misrepresents how much construction material was actually used and is paid for excess material
• Contractor delivers materials to a job site and the materials are recorded as delivered. However the contractor then removes some materials before they are used on the project
4. Product Substitution. This fraud occurs when inferior products are used in place of higher quality and higher cost materials. The inferior products are of lower cost, however the contractor charges for the higher quality products. This fraud occurs during construction projects and may or may not require the knowledge and cooperation of field inspectors.
Product substitution more occurs most often when high cost products are required. Common examples include steel that does not meet strength specifications or construction elements that are improperly constructed.
Examples include:
• The contract requires steel that meets tensile strength standards. Contractor supplies steel which does not meet standards, but charges for the higher quality steel
• The contract requires concrete structures with reinforcing. Contractor provides concrete structures that appear from outside to be in compliance, but do not have internal reinforcing. The contractor charges for the higher cost structures
Before we think about how to prevent Fraud and Corruption, we should consider why they occur. The “Fraud Triangle” identifies the three enablers of fraud.
The bad news is that FC can never be eliminated. The good news is if we eliminate one of the enablers, the risk of fraud will reduce. There are six proven tools to reduce the level of FC.
1. We need a positive “Tone at the Top” and we need a “Champion”
If there is a “Champion” at senior leadership level, and the “Tone at the Top” strongly opposes FC, that message will filter throughout the organization. Alternatively, if there is no “Champion” and the “Tone at the Top” accepts FC, we are fighting a losing battle. A strong and positive tone will begin to build a culture that FC will not be tolerated.
Projects require both Contractors and Project Owners which are usually government agencies. The “Tone at the Top” must exist in both the Contractors and Project Owners.
Two countries have recently and very publically set the “Tone at the Top” as shown by the newspaper headlines below:
• “Chinese Premier Calls for End to Corruption”
• “Obama sets up Anti-Fraud Board” (USA)
2. Build Awareness and Knowledge Throughout the Organization
An important tool to combat FC is to build awareness and knowledge that FC occurs, needs to be recognized and steps taken to report and stop it.
The perception is that FC occur at the top of an organization, however the research proves that perception is false. Fraud occurs at every level of an organization and more importantly, approximately 80% of fraudsters had never committed fraud before.
We must build awareness and increase knowledge for every employee in our organization, from the senior leaders to the individuals on our construction sites. Every employee has a role to play in identifying and minimizing FC.
Building awareness and knowledge is most effectively done through structured training. First the training needs are identified, training is designed, training is conducted and then the change in awareness and knowledge is measured.
Along with training, another tool is to highlight successes. When there are successes such as identifying or preventing fraud, or enforcement activities, those should not be kept secret. On the contrary, they should be widely advertised and promoted. Below are examples of public announcements that built awareness and will hopefully deter FC in the future:
• “TWO ROAD CONSTRUCTION COMPANIES AND FOUR EXECUTIVES INDICTED ON BID-RIGGING CHARGES”
• “FORMER TRANSPORTATION OFFICIAL AND A TRAFFIC ENGINEERING COMPANY CHARGED WITH SUBVERTING THE COMPETITIVE PROCESS”
• “CONCRETE PRODUCER AND EXECUTIVES AGREE TO PLEAD GUILTY TO PRICE FIXING CHARGE”
Other effective preventative tools are “Red Flags”. Red Flags are warning signs that FC may be occurring. The more common Red Flags in the transportation industry include:
• Decision not to engage an independent inspector/auditor
• Lack of transparency in procurement
• Sudden improvement in life style
• Known or suspected close association with contractors or suppliers
The awareness building should include discussion of Red Flags so more people are vigilant and fraudsters will have more difficulty committing FC.
3. Develop an Effective Legislative Framework
Effective laws are needed to enable action to be taken to fight FC. In some countries, effective legislation frameworks have been developed and tested over time. In others, fraud legislation is in its’ infancy. In a country where legislation is just being developed, much can be learned from other countries where effective legislation is institutionalized.
The question is: Which countries have effective legislation? One measure of effective legislation is the “CORRUPTION PERCEPTIONS INDEX” developed by Transparency International©. This index rates the perception of corruption for each country. More information can be found at:2 External <?xml version="1.0" encoding="utf-16"?><dictionary /> 0 0 0 oLinkExternal http://www.transparency.org www.transparency.org false http://www.transparency.org/ false false %>
Since there are so many types of FC, multiple laws will be required. Legislation must be developed to prohibit:
• Competitors restraining competition
• Bribery and Gratuities
• False & Fictitious Claims
• Conspiracy to Defraud and Make False Statements
• Obstruction of Justice
In addition to legislation which prohibits FC, best practice includes:
• Legislation which encourages the reporting of FC. If people know they may personally benefit from reporting FC, they may be more prone to report it
• Legislation which protects people who report FC and prevents retaliation. In the USA, this is known as “Whistle Blower Protection”
4. Support Legislation with Effective Enforcement
Although legislation is the foundation, the laws need to be enforced. In many countries this is done through enforcement agencies which have authority to investigate and prosecute FC.
The enforcement of anti-fraud legislation requires specialized skills. Someone skilled in enforcement of crowd control, may not have the skills to effectively interview a fraudster. Best practice is to establish a specialized investigative/enforcement organization for FC.
One good example of an investigative organization is the “Office of the Inspector General (OIG)” in the US federal government. The US OIG has legislative authority to conduct “Investigations of allegations that a person or entity has engaged in fraudulent or other criminal activity relating to the programs and operations of the Department or its operating administrations”.
Remember this important fact: Approximately 35 % of frauds are identified by “tips.”
The person who discloses the “tip” is a disclosure of improper or criminal activity within an organization. The tipster is commonly referred to as a “Whistle Blower”. Best practice is to establish a “Whistle Blowers Hotline”. A Whistle Blower Hotline allows people to report accusations of fraud and to remain anonymous. The Whistle Blower hotline is usually housed within the investigative organization e.g. Office of the Inspector General. It should be widely advertised, promoted, and can be very effective.
5. Establish a Procedure of “Procurement Probity”
As noted above, fraud can commonly occur during Procurement. One very effective tool to reduce procurement fraud is to use “Procurement Probity”.
Probity means that an activity is conducted according to generally accepted business principles and in a transparent manner. In other words, probity prevents fraud.
Probity can be applied through a Probity Auditor. A Probity Auditor:
• Is independent of the procurement process and not associated with the procuring organization, nor the organizations proposing/Bidding for contracts
• Observes the procurement process and ensures the procurement is conducted in an open and transparent manner
• Performs specific duties such as ensuring there is no conflict of interest and all bidders are treated equally
• Serves as a independent entity that the bidders can communicate with if they feel they are not being treated equally
• Ensures the selection is done according to pre-established selection criteria
6. Conduct Effective Audits and Show a Presence
One of the most effective and low cost tools to minimize FC are audits. Audits identify and prevent FC. Audits serve to look carefully at procedures, internal controls and generally raise awareness that “someone is watching”.
Audits should be:
• Carefully designed and focused on specific areas
• Conducted with short notice for an element of surprise
• Done frequently to show a presence so people think twice about committing FC
• Conducted according to an auditing standard. A good example of auditing standards is the US Government Accountability Office Auditing Standards (Yellow Book).2 External <?xml version="1.0" encoding="utf-16"?><dictionary /> 0 0 0 oLinkExternal http://gao.gov gao.gov false http://gao.gov/ false false %>
• Broader than just financial checks. Audits should be multi-disciplined and include financial and other experts such as engineering and construction
The Association of Certified Fraud Examiners has developed a “Fraud Prevention Checkup”. This checklist is useful if you want to conduct an assessment of your organization.2 External <?xml version="1.0" encoding="utf-16"?><dictionary /> 0 0 0 oLinkExternal http://www.acfe.com www.acfe.com false http://www.acfe.com/ false false %>
Fraud and corruption are serious problems and unfortunately widespread in the transportation sector. Fraud and corruption can never be eliminated, because people will always be tempted by money. However, this paper described effective mitigation tools and techniques. The good news is that you can make a difference. We don’t have to tolerate Fraud and Corruption. The fight against FC is not easy, but it is winnable.
People are stealing our money ! According to the
In some countries, contractors are refusing to participate in tenders/bids because of the extent of corruption.
I hope to encourage you to take action to fight Fraud and Corruption (FC).
It is impossible to precisely know the extent of Fraud and Corruption. The reason is simple. If FC are not identified or reported, it will not be known and recorded. However, there are some useful statistics that can help us understand how wide-spread FC are. Consider these facts:
1. According to the Association of Certified Fraud Examiners, in its “2012 Report to the Nations“ “… the typical organization loses 5% of its revenues to fraud each year. Applied to the estimated 2011 Gross World Product, this figure translates to a potential projected global fraud loss of more than $3.5 trillion.”
2. In a 2009 Report, the
3. The Office of the Inspector General of the
a. Convictions = 79
b. Prison sentences = 70 years
c. Fines = US$ 192, 996, 413
4. Government Services Administration of the
5. Another measure of the extent of FC is from international reports. Below are headlines from newspapers published in the last few months:
• “Corruption Deters Investment” (Latin America)
• “Power to Stop Irregular Tenders” (Africa)
• “Managers Lost Confidence in CEO” (Caribbean)
• “Premier Calls for End to Corruption” (Asia)
• “Obama sets up Anti-Fraud Board” (USA)
• “Cost of Fraud in Federal Programs Is Estimated at $12 Billion” (USA)
Fraud can occur at any stage of a project, but the amount of “money at risk” to fraud is higher at the early stages of a project life cycle.
I have been fortunate to have lived and worked in 35 countries. Based on my experience, there are four common types of FC on transportation projects.
1. Procurement of Contracts, Services or Materials. The FC that may occur during procurements includes Kickbacks, Bribery, Conflict of Interest and Bid Rigging/Collusion. FC can occur during Procurement because there are large amounts of money involved, the Procurement fraud can be committed with fewer people involved, and there may be no paper trace.
Although there are many types of Procurement Fraud, two common examples are:
• Contractor secretly pays a government official for being awarded the contract
• Contracting or oversight official fails to disclose a conflict of interest which impacts the contract award or contract oversight
2. Time Overcharging. This type of fraud occurs during a contract and may or may not involve contract oversight officials.
Examples of Time Overcharging include:
• Contractor falsely records hours worked and charges the government for those hours
• Contractor fraudulently records employees as having worked, when in fact they did not. These are known as “ghost employees”
• Contractor charges for time worked and is paid. Contractor then puts pressure on its employees to accept a lower salary than was agreed or return a portion of salary paid
3. Materials Overcharging. This fraud occurs during construction projects and may or may not require the knowledge and cooperation of field inspectors. Materials overcharging has a greater impact when there are high cost materials involved such as steel, bridge components or asphalt.
Examples of Materials Overcharging are:
• Contractor misrepresents how much construction material was actually used and is paid for excess material
• Contractor delivers materials to a job site and the materials are recorded as delivered. However the contractor then removes some materials before they are used on the project
4. Product Substitution. This fraud occurs when inferior products are used in place of higher quality and higher cost materials. The inferior products are of lower cost, however the contractor charges for the higher quality products. This fraud occurs during construction projects and may or may not require the knowledge and cooperation of field inspectors.
Product substitution more occurs most often when high cost products are required. Common examples include steel that does not meet strength specifications or construction elements that are improperly constructed.
Examples include:
• The contract requires steel that meets tensile strength standards. Contractor supplies steel which does not meet standards, but charges for the higher quality steel
• The contract requires concrete structures with reinforcing. Contractor provides concrete structures that appear from outside to be in compliance, but do not have internal reinforcing. The contractor charges for the higher cost structures
Before we think about how to prevent Fraud and Corruption, we should consider why they occur. The “Fraud Triangle” identifies the three enablers of fraud.
The bad news is that FC can never be eliminated. The good news is if we eliminate one of the enablers, the risk of fraud will reduce. There are six proven tools to reduce the level of FC.
1. We need a positive “Tone at the Top” and we need a “Champion”
If there is a “Champion” at senior leadership level, and the “Tone at the Top” strongly opposes FC, that message will filter throughout the organization. Alternatively, if there is no “Champion” and the “Tone at the Top” accepts FC, we are fighting a losing battle. A strong and positive tone will begin to build a culture that FC will not be tolerated.
Projects require both Contractors and Project Owners which are usually government agencies. The “Tone at the Top” must exist in both the Contractors and Project Owners.
Two countries have recently and very publically set the “Tone at the Top” as shown by the newspaper headlines below:
• “Chinese Premier Calls for End to Corruption”
• “Obama sets up Anti-Fraud Board” (USA)
2. Build Awareness and Knowledge Throughout the Organization
An important tool to combat FC is to build awareness and knowledge that FC occurs, needs to be recognized and steps taken to report and stop it.
The perception is that FC occur at the top of an organization, however the research proves that perception is false. Fraud occurs at every level of an organization and more importantly, approximately 80% of fraudsters had never committed fraud before.
We must build awareness and increase knowledge for every employee in our organization, from the senior leaders to the individuals on our construction sites. Every employee has a role to play in identifying and minimizing FC.
Building awareness and knowledge is most effectively done through structured training. First the training needs are identified, training is designed, training is conducted and then the change in awareness and knowledge is measured.
Along with training, another tool is to highlight successes. When there are successes such as identifying or preventing fraud, or enforcement activities, those should not be kept secret. On the contrary, they should be widely advertised and promoted. Below are examples of public announcements that built awareness and will hopefully deter FC in the future:
• “TWO ROAD CONSTRUCTION COMPANIES AND FOUR EXECUTIVES INDICTED ON BID-RIGGING CHARGES”
• “FORMER TRANSPORTATION OFFICIAL AND A TRAFFIC ENGINEERING COMPANY CHARGED WITH SUBVERTING THE COMPETITIVE PROCESS”
• “CONCRETE PRODUCER AND EXECUTIVES AGREE TO PLEAD GUILTY TO PRICE FIXING CHARGE”
Other effective preventative tools are “Red Flags”. Red Flags are warning signs that FC may be occurring. The more common Red Flags in the transportation industry include:
• Decision not to engage an independent inspector/auditor
• Lack of transparency in procurement
• Sudden improvement in life style
• Known or suspected close association with contractors or suppliers
The awareness building should include discussion of Red Flags so more people are vigilant and fraudsters will have more difficulty committing FC.
3. Develop an Effective Legislative Framework
Effective laws are needed to enable action to be taken to fight FC. In some countries, effective legislation frameworks have been developed and tested over time. In others, fraud legislation is in its’ infancy. In a country where legislation is just being developed, much can be learned from other countries where effective legislation is institutionalized.
The question is: Which countries have effective legislation? One measure of effective legislation is the “CORRUPTION PERCEPTIONS INDEX” developed by Transparency International©. This index rates the perception of corruption for each country. More information can be found at:
Since there are so many types of FC, multiple laws will be required. Legislation must be developed to prohibit:
• Competitors restraining competition
• Bribery and Gratuities
• False & Fictitious Claims
• Conspiracy to Defraud and Make False Statements
• Obstruction of Justice
In addition to legislation which prohibits FC, best practice includes:
• Legislation which encourages the reporting of FC. If people know they may personally benefit from reporting FC, they may be more prone to report it
• Legislation which protects people who report FC and prevents retaliation. In the USA, this is known as “Whistle Blower Protection”
4. Support Legislation with Effective Enforcement
Although legislation is the foundation, the laws need to be enforced. In many countries this is done through enforcement agencies which have authority to investigate and prosecute FC.
The enforcement of anti-fraud legislation requires specialized skills. Someone skilled in enforcement of crowd control, may not have the skills to effectively interview a fraudster. Best practice is to establish a specialized investigative/enforcement organization for FC.
One good example of an investigative organization is the “Office of the Inspector General (OIG)” in the US federal government. The US OIG has legislative authority to conduct “Investigations of allegations that a person or entity has engaged in fraudulent or other criminal activity relating to the programs and operations of the Department or its operating administrations”.
Remember this important fact: Approximately 35 % of frauds are identified by “tips.”
The person who discloses the “tip” is a disclosure of improper or criminal activity within an organization. The tipster is commonly referred to as a “Whistle Blower”. Best practice is to establish a “Whistle Blowers Hotline”. A Whistle Blower Hotline allows people to report accusations of fraud and to remain anonymous. The Whistle Blower hotline is usually housed within the investigative organization e.g. Office of the Inspector General. It should be widely advertised, promoted, and can be very effective.
5. Establish a Procedure of “Procurement Probity”
As noted above, fraud can commonly occur during Procurement. One very effective tool to reduce procurement fraud is to use “Procurement Probity”.
Probity means that an activity is conducted according to generally accepted business principles and in a transparent manner. In other words, probity prevents fraud.
Probity can be applied through a Probity Auditor. A Probity Auditor:
• Is independent of the procurement process and not associated with the procuring organization, nor the organizations proposing/Bidding for contracts
• Observes the procurement process and ensures the procurement is conducted in an open and transparent manner
• Performs specific duties such as ensuring there is no conflict of interest and all bidders are treated equally
• Serves as a independent entity that the bidders can communicate with if they feel they are not being treated equally
• Ensures the selection is done according to pre-established selection criteria
6. Conduct Effective Audits and Show a Presence
One of the most effective and low cost tools to minimize FC are audits. Audits identify and prevent FC. Audits serve to look carefully at procedures, internal controls and generally raise awareness that “someone is watching”.
Audits should be:
• Carefully designed and focused on specific areas
• Conducted with short notice for an element of surprise
• Done frequently to show a presence so people think twice about committing FC
• Conducted according to an auditing standard. A good example of auditing standards is the US Government Accountability Office Auditing Standards (Yellow Book).
• Broader than just financial checks. Audits should be multi-disciplined and include financial and other experts such as engineering and construction
The Association of Certified Fraud Examiners has developed a “Fraud Prevention Checkup”. This checklist is useful if you want to conduct an assessment of your organization.
Fraud and corruption are serious problems and unfortunately widespread in the transportation sector. Fraud and corruption can never be eliminated, because people will always be tempted by money. However, this paper described effective mitigation tools and techniques. The good news is that you can make a difference. We don’t have to tolerate Fraud and Corruption. The fight against FC is not easy, but it is winnable.
